The Inglis University Library Donations Department Part 1 (Memorandum to the Chair of the Budget Committee) Date: To: From: Subject: March 23, 2012 Chair of the Budget Committee Yunzheng Zhao, Management Accountant Donations Department’s Request for Additional Funding
After reviewing the budget committee’s analysis, I believe that it made an inappropriate decision in denying the donations department’s request for additional funds. I will examine its decision through a cost-benefit analysis which shows that it may have overestimated the costs of maintenance, and overlooked the benefits of this important department. The budget committee overestimated the unit cost due to missing revenue, improper cost structure, and underestimated capacity. First, based on the cost schedule, the committee overlooked the revenue that the donations department made from its bi-annual book sales. Secondly, they did not separate the fixed cost and the variable cost of books while calculating the total cost. Finally, they overlooked the possible increase in the annual capacity of processed donations that would result from hiring additional employees. To correct these errors, I revised the cost schedules and the income statements for both before and after acquiring additional funds. I decided to use the contribution approach because I believe that it will be more relevant to separate the fixed cost and the variable cost, since they will change the unit cost in different ways following an expansion of the donations department. While calculating the total cost, I believe that it would be more relevant to deduct the biannual book sales’ revenue from the total cost, because the revenue can subsidize this
department. For this reason, I used the operating loss (rather than the actual operating expense) to calculate the unit cost of donated books. As shown in Part 2, this method brings the unit cost down to $17.90 per donated book from the original unit cost (found by the budget committee’s calculation) of $18.90. (Please see Part 2 for cost schedules and calculations.) Acquiring additional funds would actually lower the unit cost of maintaining the donations department. In reality, only the variable cost will increase (based on the increase in the number of donated books); the fixed cost will merely increase by a fixed amount of $5000. Hence, the total cost after acquiring additional funds should be $23350 instead of $37800. Due to the increasing annual capacity of processed donations, the cost per book decreases by more than 30% to $12.29 because the fixed cost would be spread out over a greater quantity of books (Please see Part 2 for calculations). Also, since the donations department would be able to accept more books with more employees, the bi-annual book sales’ revenue may increase simultaneously, followed by a greater number of books being sold. (Please see Part 3 for income statements.) If the donations department were eliminated entirely, the university would only save the variable cost of $500. Staff salaries and facility costs are sunk costs involved in the library’s budget. These costs cannot be saved because the head librarian and work-study student would work elsewhere (and still earn a salary from the university) if the donations department were eliminated. Moreover, the general facility costs must be spent to maintain other services in the library. The only cost that can be saved is the RFID tag costs (approx. $500). (Please see Part 3 for saving schedule.) The committee perhaps underestimated the benefits of the donations department by overlooking its practical and symbolic significance. From a practical perspective, the existence
of rare books in this department allows more studies and research. Such resources would attract more students and respected professors to the university, in turn elevating its entire academic reputation. From a symbolic point of view, the donations department...